Inflation Redux: Legal Tech Prices Are Skyrocketing

Each week, the Law.com Barometer newsletter, powered by the ALM Global Newsroom and Legalweek brings you the trends, disruptions, and shifts our reporters and editors are tracking through coverage spanning every beat and region across the ALM Global Newsroom. The micro-topic coverage will not only help you navigate the changing legal landscape but also prepare you to discuss these shifts with thousands of legal leaders at Legalweek 2024, taking place from January 29 to February 1, 2024, in New York City. Learn more and register today:

The Shift: Inflation Redux: Legal Tech Prices Are Skyrocketing

After contending with a volatile economy last year, many legal professionals were relieved to see inflation ease significantly from its June 2022 high. But for those in the market for legal tech products—or those just maintaining the tools they already have—there's little respite from rising costs.

While legal tech prices didn't come out of last year's peak inflationary period unscathed, law firms’ technology budgets are feeling even more of a pinch these days.

There are several drivers behind legal tech’s rising costs, and they’re unlikely to abate anytime soon. In fact, higher legal tech expenses may become the norm as legal professionals and the legal tech industry reorient themselves to what some are referring to as the generative AI era. That will likely put more pressure on law firms to assess what technology products are worth the cost, and where to best direct their limited budgets.

The Conversation

Law firms are accustomed to seeing legal tech prices grow each year, or whenever they renew their sales contracts. But now, they’re seeing costs rise faster than before.

In International Legal Technology Association’s (ILTA) 2023 Technology Survey of 532 law firms, 29% cited the high cost of technology as a critical challenge, representing the highest percentage of firms who said costs are a top challenge over, at least, the past three years.

Sean Weller, senior consultant at Argopoint said he has recently seen price increase requests from legal tech providers “come to in-house legal departments at both a higher rate and at a higher cost than I’ve seen at any time in the past five years.”

One major driver behind the spike in legal tech costs is the desire by legal tech investors to see a return on their investment. “Both venture capital and private equity backers are placing significant pressure on legal technology teams to start delivering profits,” Weller explains.

Brad Blickstein, founder and principal of Blickstein Group and NewLaw Practice co-head at Baretz+Brunelle, adds that for many providers this means raising prices and going after larger clients with deeper pockets, such as those in Big Law. “[It] seems at least that the quickest way to hitting those revenue numbers is by a smaller number of big deals.”

But it’s not just pressure from legal tech investors that’s fueling price increases. Legal tech providers' embrace of generative AI also comes at a high cost.

“We saw this with [Technology Assisted Review] early on, [that] any new technology is going to start at a higher price point and then over time technology gets cheaper and better,” said Matt Jackson, counsel of data analytics and discovery at Sidley Austin.

The cost of generative AI technology, however, isn’t the only expense that legal tech providers have to factor in when pricing their offerings. They also need more AI experts to help develop the technology into products fit for legal clients. And they’ll likely be looking to their customers to recoup those longer-term investments.

“Everyone’s in the market looking for these high-paying roles. These expensive roles … So where do you get that cash from? Where do you get that budget from?” said CJ Webster, founder of C Webster Consulting.

The Significance

Of course, law firms don’t always have to buy legal tech—they can build it themselves. But that’s usually not the cheaper option, especially when it comes to generative AI-powered products.

While legal tech providers will often charge a flat fee for their generative AI-powered offerings, those directly accessing generative AI models—the technology powering these products—are paying a fee tied to usage. If law firms were to build their own generative AI tools, how much it would cost would depend on how much they’re using it.

“We’ve done a bunch of work with it. But the more you use, the more expensive it is, because you’re paying per [usage]—so it can get extremely costly,” said Ed Empamano, Dykema’s Chief Information Officer.

What’s more, the technology itself is only one part of the overall expense. Law firms without a cadre of AI experts and coders, as well as data governance processes in place to support their generative AI development efforts, are facing a much more expensive scenario. David Cunningham, chief innovation officer at Reed Smith explained that “the biggest costs will be the new roles, investments in data quality, and the time and attention from the firm’s lawyers and staff to learn, experiment, and bake AI into their DNA.”

Many law firms are therefore sticking with purchasing products from legal tech vendors. But given the rising costs of these offerings, they’re also scrutinizing them more closely—ensuring they do what the providers claim they can—before making any decisions.

“I’m starting to hear rumblings within the Am Law 200 where they’re like, ‘You know what, we’re not taking a pay increase right now…. We want to wait because you’re telling me what this product can do. You’re not showing me that I can really use it right now,’” Webster said.

Law firms are also taking into consideration what the ROI will be in buying a legal tech product. But with generative AI, the ROI isn’t always easy to measure, and will likely take a few years to materialize.

“The difficult part is, in the short term: ‘Are we going to save money by using AI? Is it going to cost the same?’ We just don’t have the metrics to really be able to do that math. But that doesn’t stop us from trying … we can be a part of the cost exercise so we can gather our own metrics on ‘Is this helping? Is it taking less time? Is it getting us better results?’” said Melissa Dalziel, of counsel at Quinn Emanuel Urquhart & Sullivan.

The Information

Want to know more? Here's what we've discovered in the ALM Global Newsroom:

The Forecast

Due to the fact that some locked in prices over several years, not all law firms are facing rising technology expenses. But it’s likely that the impact of these price increases will steadily spread across the market in the coming months and years.

“I took a gamble by locking in many contracts over a five-year period which is usually unorthodox. They will usually do three, if that … And thankfully now I’m feeling a little bit better about it. But in three years I’m certainly going to be in trouble,” Empamano at Dykema said.

Firms looking to leverage generative AI-powered offerings will see the impact sooner than most. While many law firms are piloting generative AI tools, those pilot periods will soon end, forcing them to spend considerable amounts to maintain access to the technology.

“‘Pilotmania’ is going on right now. And so everybody’s doing a ton of pilots… But then if you have 1,000 lawyers at 30 bucks a month, that’s real money,” noted David Wang, Wilson Sonsini’s chief innovation officer.

In this competitive environment, slowing down technology investment isn’t often an option. Law firms will have to figure out ways to increase their technology procurement budgets or stretch them out further than before. It’s also likely that many will also become far more discerning buyers, making sure that they get the value and capabilities they’re looking for from their technology products. Going forward, there will be less room—and money—for error.

Rhys Dipshan is the senior editor on the legal technology news desk. Contact him at rdipshan@alm.com and follow him on Twitter: @R_Dipshan